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Monetary technologies #1
Today’s post inaugurates a new Soon Parted feature on monetary technologies. Crypto ushered into public view a wave of financial novelty, capturing the collective imagination with white papers, prototypes, proofs of concept, a couple of genuinely new ideas, and some potentially instructive failures. Now banks, exchanges and regulators are trying to find out whether any of that novelty could be incorporated into the monetary infrastructure.
A new way of transacting does not necessarily change anything about the structure of financial relationships: replacing paper checks with ACH transfers doesn’t change which bills have to get paid. But innovations can, incrementally, create new dynamics and vulnerabilities in the system. This can have big consequences—mortgage securitization, for example, played an important role in how the 2008 crisis played out.
The goal of this series is to see through the novelty by focusing on the most primitive monetary technologies, and to separate their economic function from their social and institutional form. Today: the bank account.
The $17 trillion question
That is the amount of deposits currently outstanding at US commercial banks—not an endangered species, the SVB Panic notwithstanding. But what is a bank account?
Start with the normal operations of a bank—accepting deposits and making payments. As in any business, a bank’s accountants keep a general ledger, a double-entry record of every transaction that the bank undertakes. Here is a minimal general ledger, showing a $100 deposit of cash from Alpha, a $200 deposit of cash from Beta, and a $100 payment from Alpha to Beta.
In words: a bank’s general ledger is a list of transactions. There are three transactions in this example; a real bank would have many. Each transaction has at least two entries, at least one debit and at least one credit. Total debits equal to total credits for each transaction, and thus also for the general ledger a whole.
Each entry is labeled with an account, “Assets:Vault cash” for example. Each account is a name that the bank uses to group sets of transactions. Additions to or subtractions from vault cash, for example, are recorded using entries to an account by that name, categorized as one among many asset accounts.
Account names are labels, neither more nor less. There is nothing inherent about paper money, say, that puts it into the category of “vault cash.” Rather, the label is a convention adopted by accountants and used by the community of people who read the work of accountants. At the same time, accountants and bankers are bound by regulations and professional standards to use the right labels, to report certain things in certain ways, so that when the accounts say that the bank has a certain amount of cash in the vault, the rest of us can draw appropriate conclusions.
The general ledger can be interpreted, that is, because it conforms to the rules and norms of bank accounting. And the financial system can function normally in part because those rules and norms are generally followed.
Statement of account
From the general ledger we can select the entries labeled with a particular account name. What is commonly called a deposit account is a set of entries out of the bank’s general ledger, those entries relating to a commitment made by the bank to a depositor.
A statement of account makes this clear. The statement of any account is the subset of entries from the general ledger that are associated with that account. Such a statement is single-entry, and is typically shown with a balance, the sum of all the entries. For liability accounts like bank deposits, credits increase and debits decrease the balance. Using the example from above, here are statements of the bank’s accounts with Alpha and Beta:
So a deposit account is a list of entries selected from a bank’s general ledger. But that list is also the same thing that we normally mean by the phrase “bank account,” because the institutional framework within which banks operate ensures that the accounting entries behave as we expect. For example, when the statement says that Beta has a credit balance of $300, Beta can confidently spend those funds, because the bank is known to comply with banking regulations, and because the bank is known to pay for deposit insurance, and because the bank has access to the payment system.
The more things change
The bank account is an important and foundational monetary technology. It has two main parts: the list of transactions, which tells both the bank and the depositor how much the depositor can spend; and the institutions, rules and norms surrounding the relationship, which usually steer both parties into predictable behaviors—deposits, withdrawals and transfers.
Within this definition there remains considerable leeway: the list of transactions could equally well be recorded on sheets of paper or in an SQL database. Banks could be regulated by a government agency or by a private professional association. Withdrawals could be on demand, or require seven days’ notice. These details might matter, but they don’t change what a bank account is: an accounting practice.
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